Legal Insight: Legal Implications of Service Tax (SST) on Tenancy Agreements/Lease Agreement

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Introduction

Following the Budget 2025 announcement by the Ministry of Finance Malaysia on 18 October 2024, the scope of service tax has been expanded to include the rental and leasing of commercial property.

Overview of the Amendments on Service Tax Scope

The most significant change in this amendment to the service tax is that, previously, all tenancy agreements including those for commercial property rentals were not subject to SST. However, following the broadening of service tax coverage and starting from 1 July 2025, rental and leasing of properties for commercial or business purposes will now be subject to service tax as provided under column two (2), Group K, First Schedule, Service Tax Regulations 2018[1]. The service tax rate for the expanded scope of service tax specifically rental or leasing services set at a rate of 8%.

Who will be Affected?

As a result, tenants who rent properties or equipment for business use are now required to pay 8% Service Tax (SST) on top of their rental fees if their landlord or service provider is a registered person under the Service Tax Act. This places a responsibility on tenants to carry out due diligence to determine whether their landlord is SST-registered and whether the tax applies to their tenancy or lease.

Landlords with total value of taxable service exceeding the prescribed threshold which is RM1,000,000 per annum (revised from RM500,000 on 27 June 2025))[2] must register for SST and are obligated to charge and collect SST from their tenants.

Applicability Criteria

It is important to note that the expanded service tax on rental and leasing services applies specifically to commercial properties, such as office spaces, retail shops, factories, and warehouses that are used for business purposes. Rental or leasing of housing accommodations are remained excluded from the service tax, meaning landlords leasing out homes or apartments for residential use are not subject to the 8% SST[3]. Additionally, service tax is also exempted on rental or leasing services provided to the Federal Government and State Governments[4]. However, in respect of service provided to or acquired by the local authorities (“PBT”), the exemption is limited to the period from 1 July 2025 to 30 September 2025. With effect from 1 October 2025, any such services provided to or acquired by PBT shall remain subject to service tax[5].

Impact on Existing Tenancy Agreements

The recent changes will significantly impact the existing tenancy agreement or lease agreements for business purposes, especially if the agreement includes a clause that allows for rent or terms to be reviewed (i.e. a reviewable contract) or if the services are provided starting from 1 July 2025[6]. Such tenancy or lease agreements may now trigger service tax obligations, unless they fall under the specified exemptions, which will be discussed further below.

Specific Exemptions for Business Use Property

Notwithstanding that the property is rented for business purposes, there are still certain exemptions from service tax available under specific conditions. These exemptions apply to tenants or businesses that fall under the following categories:

1. Exemption from Payment of service tax under column (4), Service Tax Order (Persons Exempted From Payment Of Tax) 2018[7]
   • Effective 1 July 2025, service tax exemption is granted to taxable persons specified in column (1), Group K, of the First Schedule to the Service Tax Regulations 2018.
     
   • To qualify for this exemption:
     • The services must fall under the taxable services listed in Group K;
     • Both the service provider and service recipient are a registered person under Group K;
     • the exempted taxable service is the same taxable service provided by a registered person under Group K; and
     • The service must be used specifically for subletting or subleasing, not for personal or internal business use.
       
       
2. Exemption from Payment of Service Tax under subsection 34(3) Service Tax Act 2018
   • This covers two main scenarios:
     • A. Small and Micro Enterprise (SME)[8]: service tax exemption is granted to tenants who are micro and small enterprises with annual revenue of less than RM1,000,000.00 and registered as SME through the MyPMK system developed by the Royal Malaysian Customs Department (RMCD); or
     • B. Non-Reviewable Contracts[9]: Service tax exemption applies where the service provider is a registered person for service tax, and the contract satisfies all of the following conditions:-
       • I. it is made in writing, signed, and stamped by the Inland Revenue Board of Malaysia (LHDN) on or before 9 June 2025;
       • II. it does not contain any price revision clause or value adjustment mechanism;
       • III. it clearly states the type of service provided, a fixed (non-variable) contract value, and the contract duration; and
       • IV. it remains valid after 1 July 2025.
         
         

Conclusion

In a nutshell, the expansion of service tax to include the rental and leasing of commercial properties is a significant change in Malaysia’s tax system, carrying direct implications for landlords, tenants and businesses alike.

It is therefore crucial for all parties, especially landlords and tenants to review existing and new tenancy agreements, understand their tax obligations, and clarify how the tax will be applied and who bears the cost. Seeking professional tax or legal advice is highly recommended to ensure compliance and to assess whether contracts need to be amended or renegotiated. Early action and transparent communication can help prevent disputes and allow for a smoother transition under the new tax framework.

The views expressed herein are those of the author and do not necessarily reflect the views of the firm. Should you have any legal queries, corporate or otherwise, please feel free to reach out to the firm for further assistance.

Authored by : Lee Min Xin (Legal Associate)

Reviewed by : Kong Yiennie (Partner)

For further legal advice on Real Estate Law, please contact us, Y Kong, Wong & Partners.

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[1] Service Tax (Amendments) Regulations 2025 (PU(A) 172/2025) s 3

[2] Royal Malaysian Customs Department, Press Release: Revision to the Expanded Sales Tax and Service Tax Take Into Account Public and Industry Feedback (27 June 2025)

[3] Royal Malaysian Customs Department, Guide on Rental or Leasing Services (9 June 2025) para 23(ii)

[4] Royal Malaysian Customs Department, Guide on Rental or Leasing Services (9 June 2025) para 12

[5] Royal Malaysian Customs Department, Service Tax Policy No. 2/2025 (29 June 2025) item 3

[6] Royal Malaysian Customs Department, Guide on Rental or Leasing Services (9 June 2025) para 31

[7] Service Tax (Persons Exempted from Payment of Tax) (Amendment) Order 2025 (PU(A) 174/2025) s 2

[8] Royal Malaysian Customs Department, Service Tax Policy No. 2/2025 (29 June 2025) item 5

[9] Royal Malaysian Customs Department, Service Tax Policy No. 2/2025 (29 June 2025) item 4